China is about to become the world’s biggest green-energy market, but it’s hard for foreign firms to play

Though coal-fired power plants are the source of its world-famous pollution, China is also a world leader in renewable energy—and it plans to get bigger still. In January, the government announced that it would install 49,000 megawatts (MW) of solar, wind and hydroelectric power in 2013. In other words, China intends to add more renewable energy to its grid in this year alone than the entire generating capacity of Turkey.

Last year, China spent a record $68 billion on renewable energy projects, according to an analysis by market research firm Bloomberg New Energy Finance (BNEF). Last year it edged the US out of the top spot for both solar and wind energy production. Next year, Bloomberg projects, China will become the world’s largest market for renewable energy altogether. By 2020, the government aims to have a total of 700,000 MW of renewable energy online, including 200,000 MW of wind and 50,000 MW of solar.

“I believe the government has set the mandate to support the growth of Chinese equipment suppliers,” says Tom Doyle, chief executive of NRG Solar, one of the US’ largest solar developers. “Historically, it’s been a difficult market and I have some concerns frankly about placing NRG equity in the Chinese market.” His previous forays into China for other companies made him wary, Doyle says. Contracts with customers were subject to constant renegotiation, which made securing financing difficult.

For those US solar companies that have made the plunge into China, the wait for revenues can be long. Take First Solar, one of the largest solar panel manufacturers and power plant developers. In September 2009, it announced with great fanfare a deal to build the world’s largest photovoltaic power plant, a 2,000-megawatt project in the Ordos region of Inner Mongolia. At peak output, the project would generate enough electricity to power some 3 million Chinese homes.

But nearly four years later ground has yet to be broken on the 16,000-acre (6,500-hectare) power station. In an email, First Solar spokesman Ted Meyer said the company was still waiting for final government approval of a first, 30 MW phase of the Ordos project. In the meantime, First Solar in December secured a deal to supply 2 MW of solar panels to a Chinese developer who already had obtained government approval for another project.

Charlie Cao, an analyst with BNEF in Beijing, said in an email that non-Chinese developers hold less than 5% of the country’s solar and wind markets, while equipment suppliers’ market share is less than 10%. In 2013, China will install 10,000 MW of solar and Cao says it will likely use those projects to soak up idle capacity in its beleaguered photovoltaic panel industry.

China is home to about 80% of the world’s solar panel manufacturing capacity and most Chinese photovoltaic modules have been exported to Europe and the US. But as Chinese companies like Suntech, Yingli and Trina ramped up production—hiring tens of thousands of employees—they took on debt they could not service, as a sharp drop in solar panel prices sent revenues tumbling. The US, meanwhile, last year imposed tariffs on Chinese panels and the European Union is considering doing the same.

That, however, didn’t stop SunPower from signing an agreement last December to form a joint venture with two Chinese companies and a municipal-owned holding company to manufacture and install SunPower’s solar panels in China. SunPower invested $15 million for a 25% stake in the venture.

“The economics are very favorable in China,” says Werner. “You benefit from falling prices for solar equipment and then you install it with low-cost labor.”

The opportunity for wind developers is even bigger, given the 18,000 megawatts of wind energy China wants to commission this year. China’s homegrown wind companies dominate the domestic market, though General Electric, the US’ largest wind turbine maker, set up a joint venture in China in 2010. Vestas, the Danish wind giant, also operates factories in China.

Elizabeth Salerno, director of industry data and analysis for the American Wind Energy Association, said whether developers shift to China depends on what premium the government is willing to pay for wind energy and how fast it can connect projects to the power grid.

Given the obstacles of doing business in China, some renewable energy executives are looking to what they see as the next hot market: The Middle East. Saudi Arabia, for instance, announced late last year that it is seeking $100 billion in investment to build enough solar power plants to supply a third of the country’s electricity demand.

“I think from a risk perspective, Saudi Arabia extremely attractive,” says Doyle, the NRG Solar chief, who has been in discussions with Saudi officials. “I believe the Saudis are actually going to walk the walk when it comes to making good on their targets.”